In re the Accounting of Chemical Bank & Trust Co.

The testator, Morris Schinasi, died on September 10, 1928. By his last will and testament he devised all his residuary estate to Chemical National Bank of the City of New York in trust to pay the income to his wife and daughters. Three parcels of real property became part of the trust fund. The trustee managed the real property, collected the rentals and paid out the expense of carrying and maintaining it. In 1935 the trustee filed an intermediate account as trustee for the period from March 1, 1929, to July 31, 1935. A dispute has arisen concerning the amount of the commissions and allowance to which the trustee is entitled.

The account shows that, during the six years of its management, the trustee has collected rentals from the real property in the amount of $342,186.75. It has during the same period paid out for taxes, insurance, repairs and other expenses the sum of $231,503.43. The trustee claims commissions on the gross rentals received. The courts below have held that the trustee is entitled to commissions computed only upon net rentals.

In the statute above quoted the Legislature authorized an allowance to fiduciaries only at a rate “ settled ” by the Chancellor which “ shall be conformed to in all cases.” The rate was to be definitely fixed and no room left for variation in particular cases. “ The advantages of a fixed rate of allowance are obvious. Such a rate has the effect of law, it is known and uniform, it governs all classes, and it renders litigation unnecessary.” (McWhorter v. Benson, Hopkin’s Ch. Rep. 28, 38 [1823], 2d ed.) Time has mocked the conclusion of the learned Chancellor that a fixed rate of allowance “ renders litigation unnecessary.” After the lapse of more than a century there is still litigation and difference of opinion as to the basis upon which the rate shall he computed. The courts early perceived that the words “ receiving and paying out,” if literally construed, are comprehensive enough to include receipts and payments of every kind and description and that in some cases such a construction would produce a result which would be unreasonable and evidently unintended by the Chancellor or the Legislature. In such cases the courts have rejected a literal construction and have adopted a construction less unreasonable and more consonant with common sense. Even so, in each case the quest has been for the intention of the Legislature as formulated by it in the language of the statute and the courts may not reject a literal construction unless it is evident that a literal construction does not correctly reflect the legislative intent, as indicated by the general purpose and history of the statute and its language, read as a whole and not word by word.

The rule of that case has been followed in all subsequent cases. (Cf. Valentine v. Valentine, 2 Barb. Ch. 430 .) The rule was expressly approved by this court in Drake v. Price ( 5 N. Y. 430 ) and has not been challenged since. It has been extended by analogy to cases where the fund includes property which is subject to a hen, e. g., stock bought by a decedent on margin, Matter of Mercantile Trust Co. ( 210 N. Y. 83 ); real property, subject to a mortgage, Farmers' Loan & Trust Co. v. Turner ( 242 N. Y. 240 ); securities pledged by a decedent as collateral for a loan, (Matter of Mills, 149 Misc. Rep. 389 ; affd., 239 App. Div. 817 ; affd., 263 N. Y. 574 ). In such cases the fiduciary receives commissions only upon

In Matter of Hayden ( 54 Hun, 197 ; affd., 125 N. Y. 776 ) executors authorized by a testator to carry on his furniture business for a year claimed commissions on the amount received and disbursed in the business, though the business made no profit. In rejecting this claim the General Term said: “ The buying and selling incident to the conduct of a manufacture or other business is, at best, a species of reinvestment of the trust funds. If commissions were to be allowed each time a stock in trade were purchased or sold, it is quite probable, as well as possible, for a case to arise where the executor’s commissions would largely consume the body of the estate. Especially where the stock in trade is rapidly turned over, and no great profit is realized from the transactions. It is quite manifest that the claim for commissions on the $58,844.36 was properly disallowed ” (p. 205).

In Beard v. Beard ( 140 N. Y. 260 ) the court again was called upon to determine whether trustees are entitled to commissions on the amount “ received and disbursed ” in a warehouse business carried on by them on property owned by the testator, in accordance with the directions of their testator. In that case the gross receipts were $600,000 and the net profit was $300,000. Upon the authority of the Hayden case the executors were allowed commissions only on the net profits of the business.

This court rejected that distinction, saying: “ The rule is not thus confined, and it was not so confined in the Hayden case, and the principle underlying the decision in those cases requires that it should be applied to such a case as this. * * * We think the true rule for allowance of statutory commissions is this: Trustees are entitled to commissions for receiving all moneys which constitute the corpus of the estate, and any additions thereto from increase of any kind, and thus the moneys upon which commissions are to be computed can never exceed the gross amount of the estate and its net income; and the moneys paid out upon which commissions may be computed are the moneys paid out of the estate for debts, expenses of administration and to legatees or other beneficiaries, moneys which operate to diminish the estate as it exists in the hands of the trustees and pass out of and away from the estate. This rule excludes commissions upon investments and re-investments and moneys disbursed and received in the conduct of a business carried on to produce net income. In the case of such business, the commissions are to be computed on the net income only which came to the corpus of the estate as an increase thereof” (p.264).

“ In the case of such business ” the courts have, since that decision, invariably computed commissions “ on the net income only which came to the corpus of the estate as an increase thereof,” even where such business has been conducted in connection with real property which formed part of the corpus of the estate. (Cf. Matter of Sidenberg, 204 App. Div. 255 , where the fiduciaries maintained a hotel upon such property.) No case before the

In considering the problem underlying this difference of opinion it must be remembered that it concerns only commissions authorized under the first four subdivisions of section 285. Subdivision 9 (added to section 285 by chapter 649 of the Laws of 1923 and amended by chapter 892 of the Laws of 1934) provides that “ where an executor, administrator, guardian or testamentary trustee is, for any reason or cause whatsoever, entitled or required to collect the rents of and manage the real property, he shall be allowed and may retain five per centum of the rents collected therefrom in addition to the commissions herein provided.” Under that subdivision the trustee is, concededly, entitled to and has been allowed compensation calculated upon rents collected. The words we

It may be conceded that there are expressions in the opinion in Beard v. Beard (supra) which lend some support to the decision of Surrogate Delehanty in this case, affirmed by the Appellate Division. Even so, indication may be found in the language of the opinion that the rule there formulated for computing commissions, though expressed in general terms, was intended to apply only to moneys received and disbursed in connection with investments and reinvestments of capital and in the conduct of a business, and that in other cases the statutory commissions must be allowed, in literal compliance with the language of the statute, “ for receiving and paying out all sums of money.”

The members of the bar and the judges of the courts have so construed the decision in Beard v. Beard. In many cases since that time commissions upon gross rentals received from real property have been allowed without objection or question. That has been the general practice in the Surrogates’ Courts (See Matter of Swartz, supra), and has been followed in many cases which have been reviewed in this court and other appellate courts. Indeed, even in the case of Beard v. Beard, though the referee decided that commissions might be computed only upon the net profits of the business conducted by the fiduciaries in connection with real estate of the decedent, yet, to arrive at the net profits, no deductions were made for expenses which would have been necessary even if the business had not been conducted; that is, for

It is true that in these cases and in the cases cited by counsel in the other courts of the State where, since the decision in Beard v. Beard, commissions were allowed on gross rentals from real property, the right to such commissions was not challenged or directly passed upon in the courts. This court had said before the decision in Beard v. Beard that “ the authorities hold that where the account is rendered yearly * * * such accounting party is entitled to full commissions on each year’s receipts and disbursements ” (Hancox v. Meeker, 95 N. Y. 528 , 539), and, again, that “ We are of opinion that where a trustee is required to keep trust funds invested and to receive and pay out the income annually, and he receives the income and renders an account thereof to the beneficiary, and pays over the balance of the income, after deducting all expenses chargeable against the same, he has the right to deduct for his compensation full commissions "on the income annually received, before paying it over.” (Matter of Mason, 98 N. Y. 527 , 535.) (Italics in both citations are new.) After the decision of Beard v. Beard the rule, as stated in these earlier cases, continued to be generally applied to income received from real property and disbursements for carrying charges and maintenance of such property. It is said that the practice was due to a general failure by members of the bar to recognize the scope of the decision in Beard v. Beard, and that no appellate court gave considered approval to the practice. That may be true, but it is significant that the court which decided Beard v. Beard never felt called upon to point out in any later opinion that the prevailing practice was contrary to the law it had enunciated.

The construction of a statute accepted for over a century without serious challenge should not be changed

The trustee in his account asked credit for brokerage commissions amounting to $4,751.25 paid for brokerage commissions in obtaining lessees for some of the real property. A trustee is ordinarily not qualified to act as broker in obtaining tenants for real property. Like other persons who manage real property, he may at times obtain a tenant without the intervention of a broker, but ordinarily a trustee who manages vacant property will avail himself of the services of a broker. Indeed, a trustee might be charged-with failure to use proper care if he failed to do so. The Appellate Division has held that the brokerage commission paid constitutes a disbursement necessarily incurred by the trustee for specialized services which did not form part of the “ management ” of the property required of the trustee and for which the trustee receives, under the statute, compensation measured by five per centum of the rents collected. We agree with that conclusion.

The order of the Appellate Division should be modified as indicated in this opinion and the matter remitted to the Surrogate’s Court for the entry of an appropriate decree, with costs to all parties filing separate briefs payable out of the estate.

(concurring). I concur in the prevailing opinion.

There is much force in the argument presented in Judge Loughran’s opinion and the view taken of this matter of commissions by the Surrogate in Matter of Byrnes ( 159 Misc. Rep. 302 ). It is somewhat difficult at times to draw the line between the management of a large apartment house, including the moneys expended for maintenance, upkeep and repairs, and the running of a business. However, the distinction seems to have been drawn, without much discussion, it is true, and the allowance of commissions on the basis stated in the opinion by Judge Lehman has at least found recognition by this court in Matter of Wendel ( 273 N. Y. 532 ). Not until recent years has this question of figuring commission on the maintenance and upkeep of large real estate properties been challenged, or the meaning of section 285 of the Surrogate’s Court Act doubted in its application to such a situation.

In view of what has now been said on both sides and the arguments now pressed forward, I am inclined to adhere to the practice as it has been, leaving it to the lawmakers to express more clearly their intent if our decision be not in harmony with it.

(dissenting in part). The principal question presented is whether so-called normal or regular commissions to be awarded to trustees for the management of real estate are to be computed on gross rents or net. (See Surr. Ct. Act, § 285, subds. 1-4.)

I agree with the courts below that the answer was given in Beard v. Beard ( 140 N. Y. 260 ). In that case Earl, J., said for the court: “ We think the true rule for allowance of statutory commissions is this: Trustees are entitled to commissions for receiving all moneys which constitute the corpus of the estate, and ■ any additions thereto from increase of any land, and thus the moneys upon which commissions are to be computed can never

Not less clear is the reason for the rule of the Beard case. Under another standard a trust estate might well be lost. We need not go outside this record for an illustration. In the management of real estate, each parcel is ordinarily handled as a separate unit. . (Matter of Chapal, 269 N. Y. 464 .) The three parcels here involved are so treated in this account. One parcel (the residence property at Larchmont, N. Y.) was operated throughout the period accounted for at a continuing deficit. It is purely accidental that other estate assets produced enough income to absorb this loss. Had the Larchmont property been the sole estate asset, then the trust corpus and that alone could have been the source of commissions, if chargeable on gross rents.

The now accounting trustee nevertheless asserts that computation of commissions on a net rent base would be contrary to a practice generally followed in this State for more than a century. This is a strong thing to say. Not an item of proof of such a sweeping generality is to be found in the record. For all that there appears, any number of fiduciaries may have taken commissions on net rents during the last century.

But, however that may be, the fact is, as this court now says, that in cases in which commissions were taken on gross rents, “ the right to such commissions was not challenged or directly passed upon in the courts.” What

Thus we are free, as I see it, to leave the uniform law as we find it limpidly stated in Beard v. Beard.

I am persuaded also that the Legislature has accepted the opinion of this court in the Beard case as declaratory of the rule governing the compensation of fiduciaries.

In case after case the courts have held that in respect of business management commissions were payable only on net return. So it was ruled in respect of a furniture business (Matter of Hayden, 54 Hun, 197 ; 125 N. Y. 776 ); in respect of a wharfage and warehouse rental business (Beard v. Beard, supra); and in respect of a hotel and store rental business (Matter of Sidenberg, 204 App. Div. 255 ). In the management of real estate there are no problems comparable in complexity to those that must have been solved by the trustees in the Beard case in successfully operating the Erie Basin enterprise, with a two-year gross income of over $600,000 from wharfage

When the Hayden and Beard cases had long been in the law the Legislature, in 1923, added to section 285 of the Surrogate’s Court Act what is now subdivision 9 thereof, as amended. It is thereby provided: “ WTiere an executor, administrator, guardian or testamentary trustee is, for any reason or cause whatsoever, entitled or required to collect the rents of and manage the real property, he shall be allowed and may retain five per centum of the rents collected therefrom in addition to the commissions herein provided.” By this enactment, fiduciaries who manage real estate are assured the receipt of a management fee greater than that currently paid (at least in some localities) to non-fiduciaries. It seems to me to be incredible that the Legislature could have supposed that to this presumably gainful five per cent management fee there would be added two, four and six per cent commissions on gross rents. (See Surr. Ct. Act, § 285, subd. 8.) Real property in general could hardly carry itself and pay so high a tariff for management. I believe it was never intended that a trust was to be so administered as thus to guarantee such a profit to the fiduciary, though as a result nothing should be left for beneficiaries.

For the foregoing reasons I vote to affirm the order of the Appellate Division.

Crane, Ch. J., concurs in opinion with Lehman, J.; O’Brien and Finch, JJ., concur in the opinions of Crane, Ch. J., and Lehman, J.; Loughran, J., dissents in opinion in which Rippey, J., concurs; Hubbs, J., taking no part.

Ordered accordingly.